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The Relentless Rise Of U.S. Oil Exports

Friday June 14, 2019

1. All eyes on China as economy teeters

China

- The story of global commodity demand is a story about China. China imported more than $500 billion worth of commodities last year.

- The potential slowdown of the Chinese economy has weighed on commodity prices. Imports of both copper and crude oil declined sharply in May.

- However, the Chinese government’s stimulus measures holds out hope of keeping growth going.

- The Shanghai Composite rallied at the start of the week. “The Bank of China came out with some measures for stimulus and therefore some of the more cyclical stocks are bouncing off oversold levels,” Will James, senior investment director for European equities at Aberdeen Standard Investments, told Reuters.

- Iron ore prices shot up. “Prices are being boosted by the expectation that the stimulus measures recently announced in infrastructure will also contribute to increased iron ore demand,” Commerzbank wrote in a note.

- However, the effort may not overcome the brewing economic slowdown, which may only grow worse if the trade war remains unresolved.

2. GE’s bad bet on gas

GE

- GE (NYSE: GE) lost roughly 74 percent of its market share between 2016 and 2018, seeing $193 billion go up in smoke, according to the Institute for Economic Economics and Financial Analysis (IEEFA).

- IEEFA says that GE is a “case study in how rapidly and unexpectedly the global energy transition away from fossil fuels travels up the economic chain and destroys value.”

- GE made a major bet on its natural gas turbines for power plants. The company’s thermal power division accounted for 20 percent of its total revenues in 2014.

- In 2015, GE assumed a 3 percent compound annual growth rate for power generation over the coming decade.

- But new gas turbine orders have collapsed, with GE’s orders falling to the lowest level in 20 years in 2017. Energy efficiency and the increasing preference by utilities for renewable energy have hollowed out GE’s gas turbine business.

3. U.S. oil exports surge

Exports

- U.S. oil exports have averaged more than 3 million barrels per day for more than three consecutive weeks, after only topping that level a handful of times in the past.

- Steadily rising oil production and the gradual additions of new pipeline and export capacity in Texas and the Gulf Coast are leading to surging exports. The mismatch between light oil supply on the one hand, and the medium and heavy refining capacity on the other, has also led to more oil diverted overseas rather than consumed in the U.S.

- Several high-profile oil export terminals are racing to come online in order to take advantage of the export boom. The Port of Corpus Christi could become the largest conduit for U.S. oil exports over the next 10 years, surpassing Houston, according to Wood Mackenzie.

- Over the next 8 to 12 months, Corpus Christi may be able to handle 2 mb/d.

4. Tanker attacks push up oil

Tanker

- Two oil tankers were attacked in the Gulf of Oman on Thursday, raising tension in the Middle East. The U.S. put the blame on Iran, but like last month’s tanker attacks, conclusive evidence has been sparse.

- Nevertheless, the incident highlights the importance of the Strait of Hormuz, a narrow passage through which roughly 30 percent of the world’s seaborne oil passes. A third of the global LNG trade also moves through the strait.

- Oil prices initially jumped by more than 4 percent (although crude lost 4 percent on Wednesday) before giving away some of those gains.

- The tanker attacks themselves could amount to a minor nuisance, but the danger is it puts the U.S. and Iran on a collision course.

5. Palladium prices rebound, but off recent peaks

Palladium

- Palladium has rebounded above $1,400 per troy ounce and is trading at a technically important 100-day moving average.

- Palladium is used in emissions control technology in cars. Souring demand led to sky-high prices, but the cracks in the global auto industry – as well as a broader economic slowdown – present challenges for the precious metal’s return to recent heights.

- The recent jump in palladium and platinum “ignored the once again weak Chinese car sales figures,” Commerzbank wrote in a note. Car sales in China in May “declined by 12.5% year-on-year. That was already the twelfth consecutive month with negative year-on-year change rates.”

- A potential workers strike in South Africa could lead to a supply interruption, however.

6. U.S. 2018 supply growth largest in history

Supply

- The U.S. grew oil production by 2.2 mb/d in 2018, the largest annual increase in history.

- The previous record was Saudi Arabia in 1991 (+1.7 mb/d) following the Persian Gulf War. In third place was the U.S. in 2014 at 1.7 mb/d.

- Also, the U.S. grew natural gas production by 86 billion cubic meters in 2018, also another record annual increase, according to BP’s Statistical Review of World Energy 2019.

- “What you saw last year was really quite amazing -- this amazing unique double first for the U.S.,” said Spencer Dale, BP’s global chief economist. “This is pretty astonishing growth and I don’t think this is some sort of unique aberration. This is a function of the U.S. shale revolution in both oil and natural gas -- it’s alive and well and it’s powering strongly.”

7. Refining margins crashing

Refining

- Refining margins are crashing in Northwest Europe, a sign that the global oil demand is running into trouble. The pace of decline for product prices – gasoline, naptha – has outpaced the decline in crude oil.

- That is squeezing refiners. Bloomberg reports that the profits from producing paraxylene, a material needed to manufacturer water bottles, is at a five-year low. Ethylene margins are in negative territory. Ethylene is the building block for plastic.

- Meanwhile, oil demand is slowing to its weakest point in years. The EIA recently revised down its estimate for global oil demand to 1.2 mb/d, down nearly 200,000 bpd from the prior month.

- Several investment banks are more pessimistic. Barclays puts demand growth at 1 mb/d this year. “There is potential for further downside to demand, which means this will likely be the worst year for oil demand growth since 2011,” Barclays said.

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